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Divisionalization, Franchising, and Divestiture Incentives in Oligopoly
Michael R. Baye, Keith J. Crocker and Jiandong Ju
The American Economic Review
Vol. 86, No. 1 (Mar., 1996), pp. 223-236
Published by: American Economic Association
Stable URL: http://www.jstor.org/stable/2118264
Page Count: 14
You can always find the topics here!Topics: Games, Nash equilibrium, Social welfare, Parents, Oligopolies, Franchise agreements, Market prices, Marginal costs, Duopolies, Divestiture
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A two-stage game is used to model firms' strategic incentives to divide production among autonomous competing units through divisionalization, franchising, or divestiture. Firms simultaneously choose their number of competing units, which then engage in Cournot competition. While it is costly to form autonomous units, each firm does so in equilibrium, thus reducing firm profits and increasing social welfare relative to the case where firms cannot form competing units. With linear demand and costs, duopolists choose the socially optimal number of competing units; oligopolies with larger numbers of firms choose too many. The case of nonlinear demand is also examined.
The American Economic Review © 1996 American Economic Association